IRA Beneficiary is a trust
Client passed in 2021 with an IRA with the beneficiary as a trust.
Has already met RMD withdrawal for 2021. There are 3 beneficiaries of the trust.
What is the most tax efficient way to get at the money? To possibly avoid trust taxation and move to ordinary income of the beneficiaries.
Permalink Submitted by Alan - IRA critic on Fri, 2021-06-04 20:19
The trustee must adhere to the trust provisions. If the trust is to retain income, the higher trust tax rates cannot be avoided. Control of distributions, creditor protection, or other trust purposes often come with these higher taxes.
If the trust provisions permit, the income can be passed through the trust to the individual beneficiaries on a K 1, and taxed at their personal tax rates.
Or of the trustee has the authority to terminate the trust, the inherited IRA could be assigned out of trust to the trust beneficiaries before any distributions are made to the trust. Each beneficiary would then have their own inherited IRA to manage. This does not change the RMD requirements that would have applied to the trust.
The trust will either be qualified (most are) or not qualified. RMDs for qualified trusts and for inherited IRAs assigned out of trust will generally be subject to the 10 year rule. Annual distributions are not required, but planning is needed to avoid the tax impact of a lump sum distribution in year 10.